Officials are hoping that dealers on the illegal market will be priced out.
Last week Canada became only the second country in the world to legalize recreational marijuana, but the black market for pot is continuing to thrive as customers seek out products that they can’t buy legally, including edibles, and sellers push back on government intervention in their industry.
“We’ll keep selling what we are selling,” Don Briere, the owner of an illegal Vancouver pot shop, told The New York Times. Briere sells edibles and other products that are currently illegal under the national law, which only allows for the sale of fresh or dried cannabis, seeds, plants and oil.
Canada—especially Vancouver—has long had a thriving illicit marijuana industry, worth an estimated 5.3 billion Canadian dollars each year.
One of the aims of legalization was to close the illegal shops that are common in cities like Vancouver.
However, Briere and other industry insiders object on principle. “The government taking over the cannabis trade is like asking a farmer to build airplanes,” he said. He’s not alone. In Vancouver, hundreds of illegal shops remain open.
At a lower level, street dealers try to entice customers by offering services like delivery and selling joints at a two-for-one price. Some customers who were frustrated that legal stores ran out of product went back to their illicit contacts.
“Definitely going to use my dealer from now on his business is going way up because of your crappy service,” one frustrated customer wrote on Twitter.
Despite the disregard for the law, Canadian law enforcement isn’t likely to step up consequences for people who are selling illegally. They have their hands full dealing with more pressing issues, including fentanyl overdoses, said Chief Constable Del Manak, police chief of Victoria and president of the British Columbia Association of Chiefs of Police.
However, this doesn’t mean that authorities are oblivious to the fact that the illegal market still exists. “It is naïve to think that just because cannabis is legalized, the criminal will walk away from a highly lucrative industry,” said Del Manak.
Mike Farnworth, British Columbia’s minister of public safety, said that the government is hoping that over time the legal market will undermine the demand for illegal sales. “It’s a very Canadian way of doing things,” he said. “It won’t happen overnight.”
Farnworth added that there won’t be any police raids with “guns and head-bashing.”
However, in Toronto, police raided five illegal pot shops after the legalization law was passed. Others have voluntarily closed, showing that the government’s approach might be working. Even Briere has shuttered some of his stores across the country and is applying for licenses for the remaining stores.
Officials are also hoping that dealers on the illegal market will be priced out. Today, marijuana on the street costs about one-third of what it did five years ago, making it less lucrative for dealers.
The Canadian cannabis experience gives Canada-based investment companies an edge in picking likely winners south of the border
Tidal Royalty uses Canadian experience to aid U.S. cannabis firms to build capital and expand
Tidal Royalty’s royalty financing model works well for cannabis companies
With a fully mature cannabis regime that includes both recreational and medical marijuana at home, Canadian investment firms are looking south for greener pastures in the United States. Their analysis is that most Canadian cannabis companies are fully valued, and while there may still be money to be made by backing the winners, the real opportunity is south of the 49th parallel.
The experience of having spent years building the Canadian financing cannabis landscape gives homegrown investment firms an edge in picking likely winners south of the line. With the U.S. cannabis market worth an estimated US$6.75 billion to US$10 billion, the potential rewards are enormous. California, Nevada, Maine, Massachusetts, Washington, Colorado, Oregon, Alaska, Vermont, and the District of Columbia have all legalized recreational marijuana, and other states are poised to follow suit. In all, 30 states and the District of Columbia have legalized either medical or recreational use or both.
Little wonder that a cross-border buying binge has begun with Canadians acquiring dozens of U.S. cannabis companies. According to data from New York-based Viridian Capital Advisors, at least 40 U.S. cannabis firms have been acquired by Canadian companies during the first three quarters of this year — over double the number during the same period last year.
“They call it the Green Rush and it’s not without good reason. This is a generational opportunity to say the least.”
— Terry Taouss, President, Tidal Royalty Corp.
Tidal Royalty Team Sets Sights on U.S. Cannabis Market
Tidal Royalty Corp. (CSE: RLTY) was built specifically to get in on the “Green Rush” into the U.S. cannabis market. A leading provider of royalty financing to the legal cannabis industry, the company’s team has built, led, and advised some of the best-known cannabis businesses in Canada.
CEO and Chairman, Paul Rosen, was a Co-Founder of PharmaCan Capital, now operating as the Cronos Group, the first cannabis stock to be listed on the NASDAQ exchange. President Terry Taouss has an extensive legal background and was part of the founding management team at SiteScout, a successful advertising technology company.
“Tidal Royalty was created as a vehicle for investors to get access to the U.S. market,” says Taouss.
“There have been incredible investment opportunities in the Canadian cannabis market over the past 5 years, but those are now becoming harder to find. We think the U.S. will develop along similar lines — but in a market 10 times the size — and we are looking to place our bets early. The U.S. is our sole focus right now.”
Mining Royalty Financing Model Works Well for Cannabis Companies
Taouss says the U.S. market is in a place where the Canadian market was about five years ago. Bringing Canadian experience to bear has helped the company build a financing model to assist U.S. cannabis firms to get the capital they need to expand. Tidal Royalty uses a financing model adapted from the mining industry. In return for capital, cannabis companies give a percentage of future revenues to the financing company.
“It’s a suitable structure because like mining, cannabis has a lot of upfront costs,” says Taouss.
“The royalty model is the go-to model for financing mining businesses in Canada, so we just took that model and modified it for the cannabis industry.”
Tidal Royalty has raised over $40 million to finance U.S.-based cannabis cultivation, manufacturing, and retail operations. The company recently announced financing of up to $12.5 million in Oregon-based cannabis cultivator Diem Cannabis.
Complex U.S. is Really “50 Different Markets”
Cutting your corporate teeth in Canada helps, but the complex U.S. market poses unique challenges. Each state has its own set of rules. Taouss describes it as “dealing with 50 different markets.” Add to that the fact that the U.S. federal government still treats cannabis as illegal pursuant to the Controlled Substances Act. That means investment firms and investors alike have to do extra due diligence, especially around the myriad of regulations.
“There’s a lot of operational challenges with investing in the U.S. cannabis market. There are tax issues, there are banking issues. There are diligence issues around security, operators, and regulations. So, there’s a lot of homework that needs to be done before investing in a U.S. licensed cannabis company,” says Taouss.
The Tidal Royalty team has done that research and is now working with a growing portfolio of U.S. cannabis companies to help them expand their operations. One of the biggest challenges those companies face is a lack of investment capital. Because cannabis still federally illegal, many institutional investors that would normally be financing the industry are sitting on the sidelines.
That opens the door to a company like Tidal Royalty to finance firms they’ve identified as well-established and poised not just to expand into multiple states, but to be players in the global cannabis market.
“We’re not an early stage investor. We don’t finance ideas. We work with companies that are already established and we provide them with the capital that they need to really expand their business and take it to the next level,” says Taouss.
U.S. Cannabis Companies Get Value Chain as Well as Capital
In addition to providing companies with much-needed capital, Tidal Royalty provides an extensive value chain to the firms they invest in. They help companies network, identify opportunities for acquisitions, and expand partnerships. From Taouss’s perspective, this kind of business development is good for both Tidal Royalty and the companies it has financed.
“We take a portfolio approach to our financings. Because we diversify across operators, states, and industry verticals, we can create opportunities that help both our portfolio companies and Tidal Royalty,” he says.
“We’re constantly thinking about ways that we can help them to grow, because at the end of the day, their success means our success. If they are able to generate additional revenue — the royalties are attached, so it’s definitely in our interest to see them grow their revenue and become successful.”
Getting in on the “Green Rush”
There are risks associated with the U.S. market, not the least of which is that regulated and comprehensive Canadian market to the north. Factor in the U.S. federal government’s position on cannabis and you have uncertainty that may cause some investors to think twice.
But Taouss says the smart money is on the U.S. cannabis market becoming a fully transparent, fully regulated, and legal industry in the near future. That is what makes navigating the complexities of the U.S. cannabis landscape worthwhile.
“They call it the Green Rush and it’s not without good reason. This is a generational opportunity to say the least,” he says.